| Company Name | For plan years beginning in | Year | Month | First Segment | Second Segment | Third Segment | Plan Type |
| American Electric Power | All | 2025 | January | 4.74% | 5.55% | 5.92% | |
| American Electric Power | All | 2024 | January | 4.89% | 5.14% | 5.29% |
Have you looked at the news recently? Every news site that you visit, the headlines are plastered with “HISTORICAL INFLATION RATES” or “HIGHEST INFLATION RATES IN THE LAST 39 YEARS”. As an employee of American Electric Power, what does this actually mean for you as you approach retirement?
First off, let us define what inflation is. Inflation is known as the increase in general price levels of goods and services. Inflation is measured through the CPI, the Consumer Price Index, which is produced by the Bureau of Labor Statistics. The U.S. Bureau of Labor Statistics found that a gallon of whole milk cost $3.66 in October 2021, which is 8% more from October 2020 at $3.38 per gallon. Combined with the other goods and services, we would find an average increase in prices and calculate how much prices have increased within a given time period. Normally, the Federal Reserve targets an inflation rate of 2% and since 2016, it has been pretty consistent, only off by about a half percentage point. However, in 2021, the annual inflation rate was 7%, drastically different from the 1.4% increase in 2020 and the 2.3% increase in 2019. To put this in perspective, from 2018 to the end of 2020, CPI grew at a cumulative 5.7%. So within a single year, inflation grew faster than the three years prior.
Inflation is an expected occurrence and many people who retire tend to expect a consistent rate over their life span and calculate their retirement expenses with this in mind. However, these calculations quickly change when there are abrupt increases in inflation. Unexpected inflation can have devastating effects on a American Electric Power employee’s savings as it whittles away at your spending power faster than you expect it to. Today, you might be able to buy groceries within a certain budget, but during an inflation spike, groceries will outpace your budget and soon enough, you’ll find yourself spending considerably more for your normal grocery bundle.
In order to control the rapid rise of inflation, the Federal Reserve uses interest rates to dissipate inflationary pressures. As interest rates increase, inflation generally decreases. This relationship is caused by how interest rates affect the rate of borrowing money. When interest rates are low, people will borrow money as they pay less in interest. This fuels the economy and increases inflation. As interest rates rise, people will borrow less and the markets will move slower as there is less fuel to add to the fire. These factors go hand in hand in an economic balancing act.
You may be wondering: “How does this affect my American Electric Power pension? Should I be choosing lump-sum or annuity?” As pension lump sum amounts are calculated using the current interest rates, choosing lump-sum versus annuity can be a difficult decision. Since lump-sum pensions are inversely affected by interest rates, the higher interest rates rise, the less you will receive from your American Electric Power lump-sum pension. As interest rates rise however, annuity pensions become a lot more attractive as they use current interest rates to calculate your lifetime monthly payments.
In regards to healthcare, it is lagging behind the country’s 7% inflation rate and has only risen 2.5% over this past year. However, we are seeing a labor shortage in the healthcare sector, which can lead to a rise in wages to attract workers and would ultimately increase prices and insurance premiums for patients. Many American Electric Power retirees typically rely on Medicare to support them in their healthcare costs, however, Medicare rarely covers all costs and patients are required to pay a premium on top of out-of-pocket expenses. These premiums will increase as inflation continues to increase, leading to an overall increase in expenses for healthcare. For the upcoming 2022 year, Medicare Part B premiums increased by 14.5%, pushing the standard monthly premium to $170.10. Even though, as a whole, healthcare costs have not risen in line with inflation, we have seen very high inflation for those nearing or at retirement age.
With increasing prices in drug expenses and Medicare premiums, the Employee Benefit Research Institute (ERBI) found in their 2022 report that couples with average drug expenses would need $296,000 in savings to cover those expenses in retirement - a 10% increase from the year prior. Couples with higher drug expenses would need $361,000 to cover those healthcare costs - an 11% increase from the year prior.
Overall, the landscape of the economy is rapidly changing and these recent developments have been shifting people’s expectations and forecasts for retirement. Understanding how inflation and interest rates will affect your retirement is a vital step in crafting a successful retirement plan.
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How does the AEP System Retirement Savings Plan compare to other retirement plans offered by AEP, and what are the key features that employees should consider when deciding how to allocate their contributions? In particular, how might AEP employees maximize their benefits through the different contribution types available under the AEP System Retirement Savings Plan?
The AEP System Retirement Savings Plan (RSP) is a qualified 401(k) plan that allows employees to contribute up to 50% of their eligible compensation on a pre-tax, after-tax, or Roth 401(k) basis. AEP matches 100% of the first 1% and 70% of the next 5% of employee contributions, making it a valuable tool for maximizing retirement savings. Employees can select from 19 investment options and a self-directed brokerage account to tailor their portfolios. This plan compares favorably to other AEP retirement plans by offering flexibility in contributions and matching opportunities(KPCO_R_KPSC_1_72_Attach…).
What are the eligibility requirements for the AEP Supplemental Benefit Plan for AEP employees, and how does this plan provide benefits that exceed the limitations imposed by the IRS? AEP employees who are considering this plan need to understand how the plan's unique features may impact their retirement planning strategies.
The AEP Supplemental Benefit Plan is a nonqualified defined benefit plan designed for employees whose compensation exceeds IRS limits. It provides benefits beyond those offered under the AEP Retirement Plan by including additional years of service and incentive pay. This plan disregards IRS limits on annual compensation and benefits, allowing participants to receive higher benefits. Employees should consider how these enhanced features can significantly boost their retirement income when planning their strategies(KPCO_R_KPSC_1_72_Attach…).
Can you explain how the Incentive Compensation Deferral Plan functions for eligible AEP employees and what specific conditions need to be met for participating in this plan? Furthermore, AEP employees should be aware of the implications of deferring a portion of their compensation and how it affects their financial planning during retirement.
The AEP Incentive Compensation Deferral Plan allows eligible employees to defer up to 80% of their vested performance units. This plan does not offer matching contributions but provides investment options similar to those in the qualified RSP. Employees may not withdraw funds until termination of employment, though a single pre-2005 contribution withdrawal is permitted, subject to a 10% penalty. Employees need to consider how deferring compensation affects their cash flow and long-term retirement plans(KPCO_R_KPSC_1_72_Attach…).
How can AEP employees achieve their retirement savings goals through the other Voluntary Deferred Compensation Plans offered by AEP? In addressing this question, it would be essential to consider the specific benefits and potential drawbacks of these plans for AEP employees in terms of financial security during retirement.
AEP's other Voluntary Deferred Compensation Plans allow eligible participants to defer a portion of their salary and incentive compensation. These plans are unfunded and do not offer employer contributions, making them ideal for employees seeking additional tax-advantaged retirement savings. However, since they are not funded by the company, participants assume some risk, and the plans may not provide immediate financial security(KPCO_R_KPSC_1_72_Attach…).
What options are available for AEP employees to withdraw funds from their accounts under the AEP System Retirement Plan, and how do these options compare to those offered by the AEP System Retirement Savings Plan? AEP employees need to be informed about these withdrawal options to make effective plans for their post-retirement needs.
Under the AEP System Retirement Plan, employees can access their funds upon retirement or termination, with options including lump-sum payments or annuities. The AEP System Retirement Savings Plan offers more flexibility with in-service withdrawals and various distribution options. Employees should carefully compare these withdrawal choices to align with their retirement needs and tax considerations(KPCO_R_KPSC_1_72_Attach…).
In what scenarios might AEP employees benefit from being grandfathered into their retirement plans, and how does this affect their retirement benefits? A comprehensive understanding of the implications of being grandfathered can provide significant advantages for eligible AEP employees as they prepare for retirement.
AEP employees grandfathered into older retirement plans, such as those employed before 12/31/2000, benefit from higher retirement payouts under previous pension formulas. This offers a significant advantage, as employees can receive more favorable terms compared to newer cash balance formulas. Understanding these grandfathered benefits can help eligible employees plan for a more secure retirement(KPCO_R_KPSC_1_72_Attach…).
How can AEP employees take advantage of the matching contributions offered under the AEP System Retirement Savings Plan and what strategies can be implemented to maximize these benefits? Understanding the contribution limits and matching algorithms of AEP is crucial for employees aiming to enhance their retirement savings.
AEP employees can maximize matching contributions under the AEP System Retirement Savings Plan by contributing at least 6% of their compensation, receiving a 100% match on the first 1% and 70% on the next 5%. To enhance savings, employees should ensure they are contributing enough to take full advantage of the company's match, effectively doubling a portion of their contributions(KPCO_R_KPSC_1_72_Attach…).
What are the key considerations for AEP employees regarding the investment options available in the AEP System Retirement Savings Plan, and how can they tailor their portfolios to align with their long-term financial goals? Employees should be equipped with the knowledge to make informed investment decisions that influence their retirement outcomes.
The AEP System Retirement Savings Plan offers 19 investment options and a self-directed brokerage account, providing employees with a variety of choices to build their portfolios. Employees should evaluate these options based on their risk tolerance and long-term financial goals, aligning their investments with their retirement timeline and desired outcomes(KPCO_R_KPSC_1_72_Attach…).
As AEP transitions into more complex retirement options, what resources are available for employees seeking additional assistance with their benefits, particularly regarding the complexities of the AEP Supplemental Retirement Savings Plan? It’s essential for AEP employees to know where and how to obtain accurate support for navigating their retirement plans.
As AEP introduces more complex retirement options, employees can access resources such as financial advisors, internal retirement planning tools, and educational webinars to navigate their benefits. Understanding these resources can help employees make informed decisions, particularly when dealing with the intricacies of the AEP Supplemental Retirement Savings Plan(KPCO_R_KPSC_1_72_Attach…).
How can AEP employees contact the company for more information regarding their retirement benefits and plans? Knowing the right channels for communication is important for AEP employees to gain clarity and guidance on their retirement options and to address any specific inquiries or uncertainties they may have about their benefits.
AEP employees can contact the company’s HR department or use online portals to access information about their retirement benefits and plans. Timely communication through these channels ensures employees receive support and clarity regarding any concerns or inquiries related to their retirement options(KPCO_R_KPSC_1_72_Attach…).